Time to Tune In to Comcast’s Cheap Shares

Sept. 6, 2019 9:48 pm ET

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These reports, excerpted and edited by Barron’s, were issued recently by investment and research firms. The reports are a sampling of analysts’ thinking; they should not be considered the views or recommendations of Barron’s. Some of the reports’ issuers have provided, or hope to provide, investment-banking or other services to the companies being analyzed.

Comcast is trading at its lowest relative price/earnings ratio to the market ever and its highest free-cash-flow yield (our 9% estimate versus the Street’s 8%) and dividend yield relative to Treasuries. It will delever from three times Ebitda to two times within two years, driven by very strong broadband growth and margins, but we also expect good margin expansion from Sky and NBCUniversal.

Comcast will have easier comps in 2020, with two very significant events: the summer Olympics and U.S. elections. Film also has easier comps and should benefit from new installments in both Minions and the Fast and Furious franchises. Broadband/Sky are seeing stronger incremental margins.…Comcast is executing well and is highly diversified, with the ability to slash expenses to improve margins. Video subscribers are a concern going forward. However, broadband is as strong as ever, with rising prices and very high incremental margins with declining capital intensity. This is the primary driver of free-cash-flow growth. Price target: $54.

We are downgrading Royal Dutch Shell from Outperform to Market Perform, reducing our price target from $69 to $60. RDS has peer-leading exposure to international gas prices; lower forecast prices through year-end 2020 could limit FCF [free cash flow] growth. Cash generation through 2020 post-divestments could fall $8 billion short of shareholder returns, with dividend increase unlikely before 2021.

Weak international gas prices could persist through at least 2020, weighing on RDS’ results, given its peer-leading exposure at 30% upstream production. The stock has been flat, year to date, on a total-return basis, in line with its European peers and modestly worse than the U.S. integrated oil group. Its 6.7% dividend yield compares with a 5.2% average since 2000 and a 6% average since 2010, implying limited compensation for its $10 billion a year repurchase program. The company doesn’t expect to increase its dividend until after completing the program by year-end 2020. We see stable, $15 billion annual FCF through 2021, after factoring in our updated gas prices and assuming $60 Brent, resulting in a net cash outflow of $8 billion post-divestments to fund the repurchase program through 2020.

We expect Apple to ship 5G iPhones in second-half of 2020. While early to be talking about devices that will not hit the market for over a year, the 5G iPhone’s integration into the investor narrative around Apple shares has already begun. Our second survey of more than 1,000 U.S. iPhone owners shows that 23% are interested in purchasing a 5G iPhone, up from 18% in our June 2019 survey. We see this as a high level of interest, given limited 5G marketing/chatter to date and the high price point suggested in our survey. Looking at the remainder of fiscal year 2019, we expect limited excitement around this year’s iPhones (to be announced on Sept. 10), however, as long as services and non-iPhone devices continue to perform well, this should tide investors over until anticipation for 5G iPhones intensifies. We are maintaining our Overweight rating and $243 price target.

The last “major” iPhone cycle was the 6 Plus, which drove 52% Y/Y iPhone revenue growth in fiscal-year 2015; even the Nov. 17 release of the iPhone X drove 17% growth in fiscal 2018. The launch of 5G iPhones (enabling materially faster data transfer) should drive upgrades, especially as the 5G infrastructure improves and apps leveraging 5G permeate the App store. We are conservatively modeling 2% Y/Y iPhone revenue growth in fiscal year 2021 (in line with consensus).

Kraft Heinz’s new CEO, Miguel Patricio, hosted a meeting today with sell-side research analysts to hear their perspective and provide some more color on his approach for developing a multiyear turnaround plan for the company. Personality-wise, Patricio is the type of CEO we like to meet: humble, good-humored, and eager to listen—but also strategic and assertive. However, we didn’t hear anything to alter our concern about the significant challenges facing the company longer term and the likelihood of a dividend cut in the near term.

Fitch and Standard & Poor’s have reduced their outlooks on Kraft and issued warnings that if the company’s Ebitda stays at $6 billion, it will need to make significant asset sales to pay down debt and/or cut its dividend in order to meet their thresholds for an investment-grade rating. Patricio’s decision to pause asset sales while withdrawing Ebitda guidance was the primary catalyst for the outlook revisions. Price target: $23.

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